Article No. 105

Business Practice Findings, by James Larsen, Ph.D.

Jumping Ship - A Business Virus

Researcher discovers a new way businesses can get themselves into trouble.

Imagine being a passenger on a ship at sea and being
awakened in the dark by panicky shouting to abandon ship.
You rush onto the deck and witness passengers grabbing life
preservers and jumping overboard and urging others to follow
them before it's too late. But there are no signs of
immediate danger. Do you jump?

Let's assume for a moment that you do, but that there is
nothing wrong with the ship. Imagine your dismay as you
cling to your life preserver and watch the ship move quickly
away.

Ahh, but you'd never do that, you say. But what if the
fog was thick, you smelled smoke, and you were the very last
person left on board? What then?

Now what's this got to do with business, you say?

Jumping ship is an example of an abandonment decision made
under conditions of uncertainty and risk. People who jump
take on faith that passengers leaping ahead of them have
information justifying this choice. If that's true, then
imitating their action allows them to exploit this
information without even knowing what it is. They appear
brilliant. But if they're wrong, they're dead in the water.

Does this happen in business? Does it happen often?
Maybe so.

That's the disturbing conclusion of a doctoral
dissertation done at Stanford University by Henrich Greve.
He noticed a curious example of mass abandonment in the
U.S. broadcast radio industry and examined it looking for
evidence of "jumping ship" as an explanation. He hoped to
learn if the radio stations had fallen victim to this process
and how it had happened. What he found should concern us.

There are over 11,000 radio stations in the U.S.,
and in 1984, 286 of them, in the 12 states Greve studied,
used an Easy Listening format. But by 1993, 90% of these
stations had abandoned it, and the format had gone "belly up"
in the industry even though 9 years earlier it had been a
viable format.

Initially, Greve thought the abandonments might have been
a problem solving decision, but when he looked more closely,
he found the stations weren't having problems that would
warrant such a drastic action. Next, he explored the effect
of competition, but as the product-market niche of Easy
Listening steadily cleared of competitors, abandonment should
have slowed. That didn't happen. That left only contagion
as an explanation, that is, contagion as in the spread of a
contagious disease, and it did fit. That was the
explanation.

Contagion is a form of learning that leads to decisions.
It occurs when business owners respond to uncertainty by
comparing the practices of their firms with the practices of
a select group of other firms, called an organizational
reference group. Executives are often unaware they've
selected such groups, unaware they place so much importance
on what they do, and unaware they're comparing the actions of
these firms with their own.

Abandonment of a practice is only one kind of decision
which contagion can lead to, but it is the most dangerous.
Once you abandon a practice you stop learning anything about
it, so you're unlikely to discover if you've made a mistake.
Contagion of abandonment becomes very strong when more and
more members of the reference group begin to imitate it.
Each additional example of abandonment increases the pressure
and causes business owners to convince themselves that the
abandonment decision must be the right one. That's what
happened with the radio stations.

Imagine, if you can, every single person on a ship jumping
overboard and watching it steam off by itself. That's a
severe example of contagion, but it occurred in the broadcast
radio industry between 1984 and 1993 to the Easy Listening
format.

Like the spread of a computer virus, Greve found contact
to drastically increase the probability radio stations would
abandon the format: 14 times more likely if a corporate
sister station abandoned it, and 1,800 times more likely if a
market contact with no formal ties to the station abandoned
it. Going through a change in ownership also increased the
probability 2.4 times.